If you understand why business failures happen, you are at least half of the way towards figuring out how to prevent your company from failing. This is important not only for young companies but also for well established businesses. In an ever-changing economy no corporation has a certain future.
We’ve shared elsewhere three perspectives on why startups fail. Here, we want to share the high level lessons from an extremely important survey by the Turnaround Management Society. You may not be aware of it but turnaround specialists focus on helping established businesses in crisis to make things better again – that’s a turnaround.
Here are the important lessons I took from the survey.
First, turnaround specialists have a regular flow of opportunities because:
- an astounding 25% of all established businesses have a crisis once every 10 years, statistically speaking
- insufficient cash flow causes the crisis only 10% of the time so there is an opportunity to fix the business (and pay the turnaround consultant) before cash becomes an overwhelming issue.
Business Failures Caused By Changing Markets
Second, the inability to adapt to a changing market is one of the most important contributors to business failure. And that inability is even more a contributor to failure now than in the past. The following internal factors were cited by turnaround specialists as contributing to crises:
- 55% of the time management continued with a strategy that was no longer working for the company (#1 contributor)
- 52% of the time management did want to adapt to changes occurring around them (#2 contributor)
- 30% said changes in the market were underestimated (#6 contributor)
- 18% said no or not enough investment in the future (#10 contributor)
And by far the #1 external factor contributing to business crises at 75% is “changes in external demand,” followed by “missed technological development” 48% of the time as the #2 external factor. In other words, a changing market is the overwhelming external contributor to business failure. Economic downturns and government regulations also contribute but at a lower rate.
Third, the failure of growth strategies is a significant though not dominant cause of business failure:
- 21% failed expansion into new product markets (#9 contributor)
- 10% failed expansion into new countries (#15 contributor)
Here is that complete list:
Fourth, the problem is senior management. An overwhelming 88% of turnaround consultants blame them for the crises versus 30% middle management and a tiny 1% line employees.
Here’s the giant takeaway. Figuring out what the market wants and how to deliver it never stops being a challenge. When companies are young, failure happens most often because startups can’t make something that people want. When companies are older, failure happens most often because customers want something different and companies won’t change their ways.
How will you avoid the number one cause of business failures?